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Legg Mason Likes Blue Chips, Banks and Big

NEW YORK (TheStreet) -- Investors rushing into bond funds may not know it, but there is a once-in-a-lifetime sale right now on blue chip stocks such as Hewlett-Packard (HPQ) and JPMorgan Chase (JPM), says Legg Mason Value Trust (LMVTX) manager Mary Chris Gay.

The $3.9 billion fund, which Gay helps oversee with lead fund manager Bill Miller, is up 50 basis points over the past year. After outperforming for more than a decade, the fund lost more than half its value during the financial crisis in 2008, yet rebounded last year by returning 40.6%, or more than 14 percentage points better than the S&P 500.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Are U.S. stocks cheap or expensive right now?

Gay: We think U.S. stocks, especially megacaps that have been out of favor for most of the last decade, offer a once-in-a-generation opportunity right now. They are the cheapest on a price-to-earnings basis or almost any other metric than they have been in literally since the 1950s.

How will H-P do in a post-Mark Hurd world?

Gay: The stock is trading at around eight times this year's earnings and under eight times next year's earnings. They just raised their buyback plan from $5 billion to over $15 billion and they have $15 billion in cash. They are generating almost $10 billion a year in free cash flow, so even with the acquisitions they have on track, which are $3 billion to $4 billion or so, they still have the ability to return value to shareholders through buybacks and potentially increasing their dividend.

Another stock you like is Texas Instruments (TXN). The chips have been struggling lately, why do you like this one?

Gay: Texas Instruments is in the tech sector, which represents about a quarter of our portfolio, and the company is in an area where there is a lot of concern about growth and the sustainability of growth. We don't believe the market is giving them credit for the opportunity and the growth prospects that they have. They have a great management team and a very strong history of capital allocation. So it's a case of the market not appreciating the value that we believe is inherent in the name.

Your fund is also heavily weighted in financials. One of those financials is JPMorgan Chase. Why that particular bank?

Gay: We have had J.P. Morgan in the fund for quite a long time. They, along with a lot of other financials in the U.S., basically recapitalized in the midst of the financial crisis. They saw the problem and addressed it. Now we are in a position where some of the banks are even releasing reserves. In J.P. Morgan, we have a company that is trading at a discount to its historical range on a price-to-book basis that is likely to institute a dividend above the current level once we get clarity on the tax front.

Also in the financial sector you like Citigroup (C), a company that certainly has a lot of baggage. Why do you like Citigroup?

Gay: Citi is certainly undervalued today at around $4 a share on a normalized earnings basis of 65 to 70 cents, which we think is reasonable for earnings power in 2112. And it has tremendous opportunities for growth, not just within the U.S. but also outside the U.S. and in the faster growing regions like Asia and in Brazil. Citi essentially dominates in those places. We think the market is not appreciating the value that should be attributed to that.

-- Reported by Gregg Greenberg in New York.

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